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Paper Dragon Catching Fire

As the world watches the Greek crisis continue to unfold and threaten the entirety of that poorly-implemented experiment that is the European Union, and as forecasters proclaim that hitting the debt ceiling in August will spell the beginning of the end for American dominance in this world, all seem to be turning a blind eye from the problems rumbling deep within the belly of the dragon in the Far East. Indeed, the potential clout many talk of in regards to the People's Republic of China is far too exaggerated, and the chance of its powerful economy being but a house of cards entirely underestimated. Like the states of the West, China has been unable to spend its way out of the global economic crisis, only prolonging the inevitable.

Liu Jiayi, China's top auditor, revealed this week that the debt of local governments in China has reached a reported $1.7 trillion, equivalent to 27% of China's entire gross domestic product. These numbers are considered to be conservative as it is widely believed that many local governments did not fully report how much money they have been borrowing. By comparison, the total debt of state and municipal governments in the United States is considered to be $2.4 trillion, just over 15% of our GDP. Earlier this year, the Chinese Central Bank declared that the total local government debt was 30% percent of GDP, or $2.2 trillion, which people believe to be closer to the truth-- the auditor only surveyed 6,500 of the 10,000 local governments in China, while the central bank looked at more.

Like the United States, China's rapid growth has largely been the result of loose credit and easy money that have created a huge property bubble waiting to burst and massive inflation. Like the United States, the Communists pumped a stimulus of hundreds of billions of dollars that did nothing but increase the national debt and give a temporary reprieve to the local governments. Most of what these governments spent money on was infrastructure-related and thus have not yielded a profit-- roads, railways, bridges, buildings, many of which remained unused. A lot of these local governments also used loans to play with the property and stock markets, leading to great losses.

For the past few years many have marveled at how Chinese central planning has led to economic prosperity (if you can call a nation where only 8% of its population does not live in feudal poverty "prosperity"). Many thought that the foreign debt owned by the Communists would keep them safe from the worst of the economic crisis. However, just as economic central planning destroyed the American economy and government overspending destroyed the Europeans, so too will they bring China's economy tumbling down. The potential ramifications are numerous; it should be pointed out that many successful revolutions, the Arab Spring among them, occur in the midst of economic crisis, when the educated middle class is suddenly no longer content. Will this bring down the Communist Party? Probably not. But, given the stranglehold that repression places on economic ingenuity, and given the fact that this economic crisis is proving time and time again that governments cannot spend their way back to prosperity, it is likely that China will be far slower to recover after its fall than the Europeans and the United States. 
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